Market to SFC: more retail hedge funds please

Survey shows institutions in HK and Singapore expect their hedge fund investments to grow by 20%-25% for next two years.

A survey of attitudes towards hedge funds in Hong Kong and Singapore shows that industry participants feel the authorisation of more retail products is the key to boosting investor confidence and investment flows into hedge funds. Commissioned by Bank of Bermuda and Pioneer Investments, the survey was conducted between February and April 2004 and covers 47 firms including retail banks and IFAs, institutional investors, investment consultants and private banks in Hong Kong and Singapore.

Responses from retail banks and IFAs show that retail clients still have a lot of misconceptions about hedge funds, with roughly half reporting that their retail clients do not understand the product.

"The survey results show that retail investors are most worried about perceived risk and the lack of liquidity and infrequent redemption, when it comes to hedge fund investing," says Ed Lacis, regional head of sales and distribution for Pioneer Investments. "These results are similar to those obtained in a survey conducted by the Hong Kong IFA in 2002 when retail hedge funds first came to the market, so attitudes do not seem to have changed much in the last two years."

Lacis notes that while perceptions that hedge funds are high risk can be changed through better understanding of the varying hedge fund strategies, questions about liquidity are less easily addressed, as it is part of the nature of the product. "The benefit of hedge funds is that they invest in areas where traditional funds cannot invest. As a result, this makes them less liquid. The more liquid hedge fund strategies tend to be those, which are more correlated to traditional funds," he says.

The survey shows that market participants are positive about growth prospects in the retail hedge fund industry, predicting growth rates of between 10% and 20% this year and next. Given the small size of the existing retail market for hedge funds, $250 million in Hong Kong and S$100 million in Singapore by Lacis' estimates, this would not amount to a substantial growth in asset size.

However, Lacis says he is not disappointed with the current size of the industry, given that hedge funds are a new asset class to retail investors. Survey results show that guaranteed hedge fund products are the most popular route for retail investors to gain hedge fund exposure.

Nine out of 11 respondents say that a guaranteed wrapper significantly improves retail appetite for hedge funds despite the higher cost. Retail banks and IFAs expect guaranteed products to experience a 17% growth rate this year, compared to the 10% growth rate for single manager and fund of hedge fund products.

On Tuesday, the Securities and Futures Commission said it planned to release a consultation paper revamping its rules regarding hedge funds by the end of the year.

Pioneer Investments is in the process of authorising a retail fund in Hong Kong. Lacis expects the product to be a multi-strategy fund, with low volatility and equity like returns. However, he was not sure whether it would be worth adding a guaranteed wrapper to the product given its low volatility.

Commenting on the results from institutional investors in Hong Kong and Singapore, Paul Smith, head of global funds services at Bank of Bermuda, says, "In Asia ex-Japan, ex-Australia there is virtually no take up of hedge funds in the institutional space."

However the survey shows that institutions and their consultants believe this will change in coming years, and expect institutional investment into hedge funds to grow by 20% to 25% in 2004 and 2005. "We are expecting to see greater allocations to hedge funds from institutional investors in Hong Kong and Singapore going forward, but this has yet to materialise in dollar terms," says Smith.

The survey results from private bankers, which have traditionally been the main channel for investments into hedge funds from Asia, reveals a reluctance among private banking clients to diversify portfolios across the growing range of hedge fund strategies. "While bankers are positive on a wide range of hedge funds strategies, their clients feel most comfortable with multi-strategy fund of hedge funds, or long/short funds as they find it easier to understand the fund's strategy," says Smith.

Private bankers are recommending their clients to allocate between 13% and 15% of their portfolio into hedge funds, with several respondents considering increasing this target allocation to 20% to 25%. (For more detail about private banks' use of hedge funds, see the June/July edition of AsianInvestor magazine.)

"While this is promising for the industry, the reality is that high net worth clients are generally underweight the target hedge fund allocations recommended by their bankers," says Smith.

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